Strange as it may seem, no amount of learning can cure stupidity, and formal education positively fortifies it.
Wealth Tax: The Prime Target is the Middle Class
All along we have stated that the world is in the midst of a full-blown currency war: Japan just upped the ante by cutting rates into negative territory, and Sweden has driven the knife deeper in by pushing negative rates even lower. In fact, Sweden has stated that they are prepared to do this, till inflation is at the 2% mark. Interest rates are -0.5% currently, so one wonders how low rates will have to drop for them to hit this pie in the sky inflation target of 2%
Must Read: Little Birds Trading Plan to Wealth
Low rates are going to put pressure on China and a host of other nations to take the same route; the velocity of the “devalue or die” (currency war) game has increased five-fold. It won’t be long before the Fed is forced to take a similar path. Start paying attention to the news, for our central bankers are suddenly going to start listing a slew of factors to backtrack on their claims that the economy was sound. Many Gold bugs have been stating that the central bankers are running out of room to manoeuvre; our response to this is a dream on.
The National debt has increased by several trillion dollars since gold topped in 2011 and Gold still languishes, indicating that the masses are abandoning Gold in favour of virtual fiat (bitcoin). The wealth tax or aka the war on wealth continues unabated and nothing will stop it as the crowd is still asleep. Debasing the currency is a silent form of taxation as your hard-earned money buys less and less going forward.
Wealth Tax Via Currency Debasement
Look at the stunning rally the markets mounted when BOJ (Bank of Japan) fired its latest shot. The only day the central bankers will run out of ammunition is the day the masses wake up and that day is sadly still a long way in the making. Central banks don’t need to continuously lower rates; they can flood the markets with money while maintaining an ultra-low rate environment. What is another 1-2 trillion dollars when our debt is now over $19 trillion? What has changed between 2000 and 2016; our debt in 2000 was significantly lower, and it was even lower in 1990; from the 1980‘s the debt has tacked on roughly $18 trillion dollars and the masses are still quiet. Inflation is a hidden wealth tax and the proper definition of inflation is an increase in the money supply and not an increase in price; the increase in price is a side effect of inflation.
The short answer is that nothing has changed other than the level of the misery individuals are forced to endure. 76% of families are living from paycheck to paycheck, does that signify an improving economy for you. It seems that this phenomenon is not restricted to the poor only, according to CBS 33% of families earning 75,000 per year are living from paycheck to paycheck.
How The Fed Fosters Bubbles, March 2020 Update
Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high-interest rate, on good securities.
The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis.
Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc.
Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system. And with the system completely aflame, we asked the arsonist to put out the fire.
Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future. Full Story
Wealth Tax Via QE
Yet, the Fed’s spin-doctors are trying to persuade us that this is not quantitative easing. Certainly, it has not involved direct buying of US Treasury notes and bonds, but it has still led to a sizeable uptake of short-term Treasury bills. The difference between QE and “not QE” is mysterious, then, because liquidity has expanded and, in the process, relieving funding pressures and reduced systemic risks.
The global credit system increasingly operates through these latter wholesale markets, and often with the active participation of central banks. For some years now, the wholesale money markets have been fuelled by vast inflows from corporate and institutional cash pools, such as those controlled by cash-rich companies, asset managers and hedge funds, the cash-collateral business of derivative traders, sovereign wealth funds and foreign exchange reserve managers. Today, these pools probably exceed $30tn and have outgrown the banking systems, as their unit sizes easily exceed the insurance thresholds for government deposit guarantees.
However, not only is much of the new debt taken on since the 2008 financial crisis unlikely to be paid back but, more worryingly, it is compounding ever higher. Our latest estimates suggest that world debt levels now exceed $250tn, equivalent to a whopping 320 per cent of world gross domestic product — and roughly double the $130tn pool of global liquidity.
We should expect QE5, QE6, QE7 and beyond. Take a step back, though. A rising tide of liquidity floats many boats, but we know from experience that liquidity-fuelled asset markets usually end badly, as they did in 1974, 1987, 2000 and in 1989 in Japan. In this regard, the scale of recent Fed interventions needs to be understood. Last year, US markets enjoyed their biggest effective inflow of liquidity in more than 50 years, by our measures. Full Story
Coronavirus and excuse for central bankers to flood the system with money
The reason the markets have overreacted to the Coronavirus is because of one simple factor; weaponised news. The crowd is being driven by fear as opposed to logic, hence the strong market reaction, but that reaction will be even stronger to the upside when this fear finally subsides. Every bull market experiences at least one backbreaking correction that is falsely mistaken for a market crash. The current correction could morph into a backbreaking correction.
Astute investors will embrace this correction and load up on quality stocks for, 15 to 24 months from today, many stocks such as IAC, AAPL, GOOGL, NVDA, FB, MTCH, etc, will be trading 80 to 200% higher.
How to fight this Hidden Wealth tax
Successful investing is based on taking the long term view and the best time to invest in stocks, if one adopts this view is when the markets are in turmoil. If one looks at our portfolios, one will see that from a historical basis, the most significant number of buys were triggered during moments of chaos. It’s when the masses are panicking that one has the opportunity to get into quality stocks at a considerable discount.
Take the 2008 correction/crash; even if you were stopped out several times from the same play, you would have still walked away with huge gains, as long as you were not dumping money into some speculative or poorly run company.
Create whatever crisis you want to create, but once the panic subsides the masses (always) regret their decision, vowing that it will be different the next time. When the next time approaches, they act precisely in the same manner as they did the last time, proving the mass mindset is programmed to panic at precisely the wrong time. One could almost go as far as to say that the mass mind-set has a secret desire to lose, for it does the same thing over and over again, virtually guaranteeing a negative outcome. Doing the same thing over and over again and hoping for a new result is the definition of insanity